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Dayang Enterprise Holdings Bhd's (KLSE:DAYANG) price-to-sales (or "P/S") ratio of 1.4x may not look like an appealing investment opportunity when you consider close to half the companies in the Energy Services industry in Malaysia have P/S ratios below 0.7x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.
See our latest analysis for Dayang Enterprise Holdings Bhd
How Dayang Enterprise Holdings Bhd Has Been Performing
Dayang Enterprise Holdings Bhd could be doing better as it's been growing revenue less than most other companies lately. One possibility is that the P/S ratio is high because investors think this lacklustre revenue performance will improve markedly. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
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Do Revenue Forecasts Match The High P/S Ratio?
In order to justify its P/S ratio, Dayang Enterprise Holdings Bhd would need to produce impressive growth in excess of the industry.
Taking a look back first, we see that the company grew revenue by an impressive 26% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 12% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.
Shifting to the future, estimates from the six analysts covering the company suggest revenue should grow by 9.2% over the next year. Meanwhile, the rest of the industry is forecast to only expand by 4.0%, which is noticeably less attractive.
In light of this, it's understandable that Dayang Enterprise Holdings Bhd's P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
What Does Dayang Enterprise Holdings Bhd's P/S Mean For Investors?
Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
As we suspected, our examination of Dayang Enterprise Holdings Bhd's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.